Changes to DB Transfer redress calculations

FCA redress guidance has been updated as at March 2021 – this article explains the background as at the date of the Government’s announcement of the change and has now been updated with a follow up article which can be read here.

The FCA has announced its intention to amend guidance for firms on how to calculate redress for unsuitable DB transfers in mid-March 2021 to reflect Government changes to the way that the Retail Prices Index (RPI) inflation measure is calculated from 2030.

FCA redress guidance FG17/9, originally published in October 2017, refers to both the RPI and the Consumer Prices Index (CPI). The RPI change means that from February 2030 the -1% adjustment to the RPI assumption used in the guidance to calculate the CPI assumption will not reflect the assumed difference between the RPI and the CPI. It will be too large, and some consumers may not receive the correct amount of redress.

This will affect consumers who transfer out of DB pensions that are uprated annually in line with the CPI.

The CPI adjustment will be made by mid-March 2021 but it will be backdated to 25 November 2020 and will apply to all calculations carried out from that date, as set out below.

What firms should do until the guidance is updated

The actions set out below apply to calculations of pension transfer redress offers done in accordance with guidance on or after 25 November 2020. They apply regardless of whether a redress offer has already been settled, including on a ‘full and final settlement’ basis. If, after considering this statement, a firm believes that a calculation might have ‘unduly disadvantaged’ a customer, they should revisit the calculation:

  • Firms should consider whether the current approach to calculating CPI inflation in the guidance causes disadvantage to consumers, given changes to market inflation expectations reflected in the Bank of England’s UK instantaneous implied inflation forward curve (gilts) which can be found here.
  • Where possible, firms must ensure that the redress calculation reflects the features of the customer’s original defined benefit pension scheme (paragraph 3 of the guidance) so as to place the consumer as far as is possible in the position that would have applied if the unsuitable or non-compliant advice had not been given.
  • Where a customer was eligible for CPI-uprated benefits if they had not transferred, and firms are aware that applying the guidance results in an inflation assumption that does not reflect CPI, they must account for this in their redress calculation. If firms are unsure how to account for this, they should wait for the updated guidance before proceeding with the redress calculation, and must advise the customer accordingly.
  • Firms that are concerned about running over the 8 week limit in rules for responding to complaints should send a written response explaining why and indicate when they will provide a response.
  • Firms should not settle redress payments, including on a ‘full and final settlement’ basis, until the guidance has been updated.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

This looks like an unintended consequence of the recent Spending Review Statement but potentially has significant implications for any firm where redress calculations are in progress or have been settled since 25 November 2020. Not only is additional work required on redress that firms thought to be finalised but there could also be an additional sum that needs to be paid to clients.

Action Required By You

Any redress calculations in progress should be put on hold until the new guidance is available. If required, clients should be kept informed of the situation and likely timescale for resolution. Redress calculations and settlements made since 25 November 2020 should be revisited and amended if required to reflect the new guidance.
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About the Author

Paul is a Chartered Financial Planner and is well on his way to a Fellowship. He has a thirst for technical knowledge and, while he advises on all aspects of financial services regulation, he specialises in pensions and investments.

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